Alibaba’s E-Commerce Business In China To Be Boosted By Domestic Growth

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Online retail giant Alibaba (NYSE:BABA), the largest e-commerce company in China, is poised to benefit from the continued growth in the country’s e-commerce market. China’s e-commerce market (in terms of gross merchandise volume) has overtaken the U.S. online retail market and become a RMB 3.9 trillion market (roughly $611 billion) in 2015, compared to $342 billion worth of online retail merchandise sold in the U.S. [1] [2] As shown in the table below, China has a higher proportion of online sales as a percentage of total retail sales compared to the U.S. A main driver behind that number is the lack of high-end brick and mortar stores in many parts of China. Moreover, smartphone and internet penetration in China has grown considerably over the last few years, leading to strong growth in the e-commerce space.

baba_ecom1baba_ecom3Within the Chinese e-commerce market, the total GMV displayed above includes wholesale or B2B e-commerce sales in addition to retail (or B2C) sales. According to China Internet Watch, B2B e-commerce sales in China were estimated to be around RMB 25 billion, which is fairly insignificant relative to the total market size. [3] This is also evidenced by Alibaba’s revenue split via the retail channel (RMB 75 billion in 2015) and the wholesale channel (RMB 4 billion) in China. While China’s e-commerce market size expanded by 33% in 2015, Alibaba’s total GMV increased by just under 30% in the same period. Alibaba’s market leading position in the relatively nascent and faster-growing Chinese e-commerce market helped its revenues grow from about RMB 11.7 billion ($1.2 billion) in 2011 to RMB 74.8 billion ($11.7 billion) in 2015.

baba_ecom2According to eMarketer, China’s e-commerce retail sales could grow at a CAGR of 28% from 2016 through 2018 to become a $1.7 trillion (or RMB 10 trillion) market by 2018. [4] We forecast Alibaba’s GMV to increase at a more conservative 20% in the same period, owing to the increasing competition from smaller players such as JD.com (formerly 360 Buy), Suning, Amazon (NASDAQ:AMZN) and some domain-specific players such as Gome and Dangdang.

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Notes:
  1. Retail Sales of China Consumer Goods Exceeded $4,573B in 2015, China Internet Watch, February 2016 []
  2. U.S. e-commerce grows 14.6% in 2015, Internet Retailer, February 2016 []
  3. China B2B E-Commerce Market 2014-2015, China Internet Watch, April 2016 []
  4. China to Become Largest E-commerce Market in 2015, China Internet Watch, November 2015 []